Academics say that the stock market is random--that there is no pattern to price movements. Now take a look at the chart, which plots a foreign exchange rate along with a price index for the global stock market. Random? Not a chance. This year these two price series have marched almost in lockstep.

When the euro appreciates against the yen, stocks tend to do well. When the euro falls, stocks tend to do badly. The correlation between daily changes in closing price in the two price series is 0.93, on a scale where 1.0 would tell you that one change is always a fixed multiple of the other. The stock price used here is the Morgan Stanley
(nyse:
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) World Index, which tracks 1,869 stocks in the world's developed markets.

What's going on? The connection starts with the weak Japanese economy. To give it a spark, the Japanese central bank keeps interest rates extremely low. These low rates have not inspired the Japanese to put capital into either machinery or houses. Instead, the capital is being swept abroad. Speculators in Europe and North America borrow in yen at those low rates, convert the yen into euros and other currencies, and invest in higher-yielding assets elsewhere. This is called the yen carry trade.

The borrowed Japanese money buys gold, stocks, bonds, you name it. But the net flow of capital is, ultimately, heavily into stocks. On days when the process moves in the forward direction, the euro is bid up, the yen is bid down, and stocks in the U.S., Europe and Australia are bid up.

I expect this flow of capital to continue. But what if it went into reverse? What if the Bank of Japan suddenly raised short-term interest rates, choking off the yen carry trade? Then folks would sell stocks globally. They would sell euros, Aussie dollars and U.S. dollars in order to buy yen and repay the loans. That would send capital flooding back into Japan--making Japanese stocks strong relative to all else.

It is noteworthy that, in two corrections this year (starting in February and July), Japanese stocks outperformed. They also outperformed when the Bank of Japan twice raised rates a hair. Overnight money in Tokyo is now priced at 0.5%.

Again, I expect the flow of capital out of Japan to continue, and I remain very bullish about non-Japanese stocks. Right now you should be particularly heavy in emerging markets, in Germany, in energy, industrials and materials. But a smart investor hedges his bets. To hedge against the possibility that yen carry trades reverse, you should also have money in Japanese stocks. At the moment I have 12% in Japan versus the world's weighting of 10%. Here are some you should consider.

Nippon Telegraph & Telephone (23, NTT) is dominant in landlines, wireless and Internet. The stock is cheap at 70% of revenue, 35 times earnings for the year that ended last March and 13 times likely earnings for fiscal 2008.

TDK Corp. (85, TDK) is buying back its own stock and taking over other firms. TDK's core business is magnetic components for electronic memories, a tough field--but it grows moderately, improving earnings. It sells at 1.6 times revenue, which is cheap for an electronics firm, and at 17 times 2008 earnings.

NEC (5, NIPNY) is the granddaddy of Japan's tech firms, trading in America since 1963. But it's in trouble now--just got delisted from Nasdaq for failing to file financials on a timely basis tied to very complicated revenue recognition rules. Its dilemma is your chance to buy cheaply. NEC sells at 20% of trailing revenue and at ten times my estimate of 2008 earnings.

Besides beer, Kirin Brewery (13, KNBWY) makes, tea, coffee, dairy products and processed meats. It's as safe a Japanese stock as you'll find yet should be responsive to a Japanese rally. It sells at one times revenue and 19 times my estimate of 2008 earnings.